Regulation of bank capital and liquidity 225
Practice questions Despite the significant strengthening of rules on bank capital and liquidity during the last decade, and the partial move away from meta-regulation in the calculation of bank’s capital requirements, banks remain undercapitalised and susceptible to financial distress in the case of dramatic changes to external market conditions. Critically discuss. You may also find it useful to review the chapter through the following questions:
• How did international bank capital standards emerge? Why is international converhence important in this area?
• According to the reforms introduced by Basel III to the Basel II framework, explain
briefly what types of regulatory capital must banks currently maintain.
• What are the different types of risk against which banks must maintain regulatory
capital?
• What instruments qualify as bank capital? Explain the difference between Tier 1 and
Tier 2 capital.
• What is the purpose of leverage ratios?
• How is bank liquidity regulated?
• Explain the rationale and content of regulatory proposals known as Basel IV.
